Portfolio Discussions: Bear market concerns
Etched in the memory of many investors are two historic bear markets: the tech bubble of 2000 and the financial crisis of 2008. It has been nearly nine years since the 2009 market low, and with the S&P 500 near its all-time high, some investors fear another bear market is right around the corner. However, new highs don’t necessarily mean new peaks, and while a correction is always possible, it is unusual to have a bear market without an economic recession.
New highs are not the same as new peaks
- Nine years into this bull market, the S&P 500 has soared by nearly 300%. While early returns were driven by earnings growth, valuations have also risen, leaving the S&P 500’s price-to-earnings (P/E) ratio above its long-term historical average.
- While gains have been impressive and stocks are no longer as cheap as they once were, they still look inexpensive relative to core fixed income.
- For investors who may have seen their equity exposure swell beyond its strategic allocation, a conversation about rebalancing may be in order.
Bear markets do not just happen…external factors cause them
- Given the market’s ascent to new highs, many investors wonder if these levels also represent a new peak.
- History shows that certain conditions—including economic recessions, aggressive rate hikes and oil price spikes—have all been associated with bear markets. Today, it is hard to see any of these issues on the horizon.
- Valuation is a poor short-term performance indicator, but investors should remain well balanced in case of a pullback. However, the onset of a large bear market seems to lack an immediate catalyst.
Earnings should support returns
- Healthy economic growth boosted by fiscal stimulus should lead to solid profit growth this year, providing support for U.S. equities.
- Corporate balance sheets, with large cash piles and manageable debt loads, also remain healthy and do not suggest that there are large issues looming in the corporate sector.
- While a bear market does not seem imminent, investors should maintain a diversified portfolio to help protect against unforeseen pullbacks or corrections.
- The length of the bull market is not a reason to get out of equities, but could be a good reason to discuss rebalancing.
- A growing economy and stronger earnings, coupled with investor-friendly corporate actions, continues to support the case for owning equities.
Focusing on different asset classes or regions, Portfolio Discussions help to frame investment conversations using slides from the Guide to the Markets.
Diversification does not guarantee investment returns and does not eliminate the risk of loss. Diversification among investment options and asset classes may help to reduce overall volatility.